(Corrects May 4 story to show that Subramanian served as an expert witness for Xerox's activist shareholders, not for Xerox, in third paragraph.)

By Liana B. Baker and Laharee Chatterjee

May 4 (Reuters) - Xerox Corp on Friday appealed a New York court ruling to block its deal with Fujifilm Holdings , just hours after the company announced that its ousted CEO and directors would remain in place. Xerox said its entire board and management team would stay, as the agreement to oust them reached with dissenting shareholders Darwin Deason and Carl Icahn expired late Thursday.

"With the caveat that I have not been privy to these negotiations, I find the rejection of the settlement by the Xerox board to be extraordinary and highly unusual," said Guhan Subramanian, a professor at Harvard's law and business schools, who served as an expert witness for the activist shareholders in the litigation.

Officially, Xerox and the activists said the agreement had expired over last-minute issues that arose in negotiations with the judge overseeing the case that made the parties unable to finalize their settlement ahead of a self-imposed deadline Thursday evening.

A source familiar with the matter said Xerox's board let the settlement expire because it came to believe it had flexibility to renegotiate a deal with Fujifilm. Xerox's board also took into account that the company's shares had fallen more than 10 percent since it announced its settlement with the activists.

The judge said in a hearing on May 3 that he was not prohibiting Xerox from exploring other transactions with Fujifilm, according to a court transcript.

In fact, Xerox has already started renegotiating its deal with Fujifilm, according to the source, who did not want to be identified because the matter is private. The companies are discussing adding $5 a share to the $2.5 billion special cash dividend of roughly $9.80 per share that Xerox shareholders would receive as part of the deal, the person said.

The two companies could also come up with a new structure all together, the person added. Fujifilm declined to comment on the negotiations on Friday, which were first reported by The Wall Street Journal.

Xerox shares closed little changed at $28.38 per share on Friday.

AMMUNITION FOR ACTIVISTS?

Xerox and Fujifilm agreed in late January to a $6.1 billion deal that would merge the U.S. printer and copier maker into Fuji Xerox, an existing joint venture between Xerox and Fujifilm. A New York court temporarily blocked the transaction last week, saying that Xerox Chief Executive Officer Jeff Jacobson was "hopelessly conflicted" and that he sought to conclude the deal even though he was advised to end negotiations.

In its appeal on Friday, Xerox disputed the court's findings that the board breached its fiduciary duties in approving the deal and said the board unanimously authorized the deal.

Meanwhile, Deason and Icahn, who own about 15 percent of the company, have vowed to keep fighting Xerox, and will nominate a slate of directors at the company's upcoming annual board meeting.

Charles Elson, professor of corporate governance at University of Delaware, said the confusing turn of events at Xerox "give the activists more ammunition" in a proxy fight.

Deason and Icahn have argued that Xerox's board acted in a self-interested fashion and failed shareholders by approving a deal that undervalues the company.

Xerox's board has also been exploring its options. Reuters previously reported that buyout firm Apollo Global Management LLC has approached Xerox to express interest in a possible acquisition.

Fujifilm, which had objected to the settlement between Xerox and the activists, said it was satisfied that Xerox had not settled with the activists this week. Fujifilm is also planning to appeal last week's court order and said in a statement on Friday that Xerox shareholders should decide for themselves the merits of any deal.

But a deal under new terms between Fujifilm and Xerox is far from certain. Fujifilm shares have been falling since the deal announcement in late January as investors have been questioning the benefits of the deal.

Reporting by Liana B. Baker in Los Angeles and Laharee
Chatterjee in Bengaluru
Additional reporting by Shubham Kalia in Bengaluru and Makiko
Yamazaki in Tokyo
Editing by Saumyadeb Chakrabarty and Leslie Adler